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As we approach the end of the year, we can say with certainty that the market continues to amaze us. Of course, we have had our ups and downs, but the overall outlook of the economy and market continues to be positive. Investors are less dubious about a potential recession as the Federal Reserve carries out a soft landing. In this market perspective, we want to highlight some critical economic changes that have shaped investors' market outlooks and influenced the Federal Reserve's decision to bring us where we are now. Many economic factors have proven resilient in the current macro environment, from slowing inflation to stable employment and increasing GDP (Gross Domestic Product ). In return, the Federal Reserve implemented its first rate cut since it began the hiking cycle in March 2022. A rate cut intends to stimulate the economy; however, some may think the economy is struggling. Recent reports show positive GDP growth, inflation under 3%, and unemployment is still at a healthy level. As we enter this new era of decreasing interest rates and upcoming elections, we may experience more volatility. Still, forecasts suggest the market will end with positive returns and continue the uptrend until the following year.
Inflation
At the beginning of 2024, inflation had already dropped significantly to 3.1% YoY (Year-over-year) compared to all-time highs in 2022. As of August, Core PCE (Personal
Consumption Expenditures excluding food and energy) sits at 2.7% YoY (September
reading published on 10/31), while CPI (ConsumerPrice Index) and Core CPI sit at 2.4% YoY and 3.3% YoY respectively for September 2024. Overall, inflation has been on a downward trend throughout the year, and the Federal Reserve believes this trend will continue throughout the end of the year and the following year, with a median forecast of Core PCE of 2.2% in 2025. The September Federal Open Market Committee meeting released a summary of economic projections. This report shows that June PCE and Core PCE projections for 2024 were much higher than the current projections, but unemployment, on the other hand, was revised upward to 4 pp (percentage points) higher than June's projection of 4.0% in 2024. As a result, inflation expectations have declined, but the Federal Reserve has shifted its focus to maintaining a healthy level of unemployment by implementing its first rate cut.
Interest Rates
For a while, many questioned the Federal Reserve's decision not to cut rates earlier in the year when the ECB (European Central Bank) and other countries had already started reducing rates. Although many think we are behind the curve, the Federal Reserve
implemented its first rate cut of 50 basis points despite Core PCE not reaching its
desired level of 2%. The Federal Reserve had been hesitant for a long time, but what influenced their decision was the current unemployment rate trend. The chart on the right illustrates the monthly unemployment rate since January 2020; during COVID, it spiked up to almost 15%. Most recently, unemployment peaked at 4.3% in July but dropped to 4.1% in September. The Federal Reserve has communicated that an unemployment rate below 5% is considered a healthy level, and it remained below 4% over the last two years until May of this year. Forecasts and the Fed's economic projections indicate that unemployment may increase to 4.4% by the end of the year.
Market Overview
During the first week of August, we experienced the highest level of volatility seen in the year, with the VIX (CBOE Volatility Index) reaching a level of 65 in a single day. Part of this move had to do with the employment situation report posted on 08/02/0224. The report showed an increase in non-farm payrolls of only 89k (Revised to 142k), and this short-
term indicator caused many investors to panic, but within a week, the market bounced back. Nonetheless, we have seen some shifts in market trends due to changes in monetary policy and upcoming elections. Market fluctuations due to market reports are justified as they are backed up by facts and statistics. However, reactions to upcoming elections and the candidates running for the presidency are purely emotional. As represented in this chart, the market has consistently moved upward regardless of what party is in office. In any event, we still want to ensure our portfolios are positioned correctly as trends shift to mitigate the risks of the ever-changing market.
CWM Portfolios
Over the last three months, we have seen some changes in market trends. Consequently, we have implemented a few changes in our client portfolios. As the Federal Reserve announced its first rate cut in September and projections for additional rate cuts throughout 2025, we have decided to extend duration and obtain exposure in other sectors of the bond market. Regarding equities, we have slightly increased our small-cap
and international exposure. As shown in one of the slides by Franklin Templeton, "The Rotation has Begun," this isn't to say that we will completely divest from one area and move to another; our approach is to keep our portfolios well diversified with a slight tilt on areas that are outperforming. As always, we want to support our clients and not let short-term concerns overshadow long-term goals. Staying the course is crucial to long-term investing and achieving your financial goals.
Corinthian Wealth Management is your partner regarding your finances. We are a resource when you have questions. If you want to know how something will impact your financial situation, please get in touch with your main advisor at (408) 995-0915.
Advisory services offered through Corinthian Wealth Management, Inc. a Registered Investment Advisor.
Sources
"Anatomy of a Recession" fourth quarter 2024 by ClearBridge and Franklin Templeton.
"Summary of Economic Projections" released September 19th, 2024. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240918.pdf
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